Speaking at yesterday's Meet the Managers forum in Auckland hosted by Heathcote Investment Partners, McEntee said both the demand for and the supply of bonds issued by local government entities is likely to increase significantly in the next few years.

He said local government bonds are an attractive investment because they offer higher returns than central government bonds (Forsyth Barr's local government bond fund is returning about 7.5%) but are relatively risk-free.

There has been no history of local government debt defaults in New Zealand, McEntee said.

"I looked for ages for a default and I couldn't find any so eventually I gave up, I think there was one in Thames during the Great Depression and Waiheke got into a bit of trouble during the 70s so it merged with the Auckland City Council."

And investors are going to get more opportunity to invest in these bonds, thanks to the emergence of listed local government bond funds (like the one run by Forsyth Barr) and due to the new Local Government Funding Agency, which will consolidate much local government borrowing.

McEntee said the amount of local government debt on issue was likely to rise from its current $5 billion to $10 billion in the next few years.

His colleague Kevin Stirrat, head of funds management at Forsyth Barr, told the forum bonds had outperformed equities for the last 30 years and were likely to continue to do so in the near future if current conditions of low interest rates and low inflation remain.

"For a whole generation of investors bonds have beaten equities - the last time that happened was prior to the civil war in the US so it is quite a rare phenomenon."